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Brexit and Trump Presidency Increase Uncertainty in Global Economy

OTTAWA, Feb. 2, 2017 /CNW/ - The global economy is facing several headwinds that will restrain growth over the near term. Real GDP expanded by only 2.5 per cent in 2016, and only a slight uptick to 2.8 per cent is expected for 2017, according to The Conference Board of Canada'sWorld Outlook: Winter 2017.

"Uncertainty is a major factor behind the weak global economic outlook," said Kip Beckman, Principal Economist, The Conference Board of Canada. "A Trump administration, victory by the "leave" side in the Brexit referendum, the rise in popularity of parties on the far right in Europe, and China's ongoing structural adjustments are just some of the factors causing uncertainty on the world stage."

Highlights

The world economy is expected to expand by 2.8 per cent this year.

World oil prices are expected to remain low at less than $60 a barrel.

The U.S. economy will expand 2.3 per cent over the near term.

President Trump is taking over an economy that is in good shape. Higher household spending was a key factor in boosting growth above 3 per cent in the third quarter, as rising income provided American households with additional discretionary money to spend. With the unemployment rate below 5 per cent, labour markets are also performing well. Household spending is expected to remain solid going forward and investment spending should strengthen over the near term, thanks in part to a rebound in world oil prices.

According to the U.S. Outlook: Winter 2017, the U.S. economy will expand at an annual pace of 2.3 per cent in both 2017 and 2018. However, the Trump presidency adds numerous risks—both positive and negative—to the outlook. In particular, his threats to tear up the North American Free Trade Agreement (NAFTA) and slap large tariffs on imports from China could start a trade war that ends up hurting U.S. export growth, as trading partners like China and Mexico retaliate and put in place their own tariffs on U.S. imports.

Should President Trump's planned dissolution of NAFTA and implementation of large tariffs on imports from Mexico come to fruition, the Mexican economy could be seriously damaged due to its heavy dependence on access to the U.S. market. The hope for Mexico is that its government's reform agenda will be successful in offsetting some of the potential damage. GDP growth in Mexico is expected to increase in the 2.5 per cent range over the near term.

The heavily export-oriented Asia-Pacific region will also be concerned about the potential for a trade war now that the Trans-Pacific Partnership is dead. A potential offset to the negative effect of Trump's policies is the U.S. dollar, which has surged in value against Asian currencies due to rising U.S. interest rates. This should make Asian exports more competitive in the key U.S. market. China's economy is on track to expand at 6.5 per cent in 2017, as stronger housing activity and a rebound in global demand for high-technology products support the economic upturn. Rising debt levels at some banks and state-owned enterprises and overcapacity in industries such as steel and coal do, however, pose economic risks. Meanwhile, the Bank of Japan's ongoing efforts to reflate the Japanese economy remain stuck in neutral, with real GDP growth expected to expand by just 1.1 per cent in 2017. Overall, the Asia-Pacific region is expected to grow in the 4.5 - 5.0 per cent range over the near term.

Economic growth in the European Union is expected to decline slightly this year, increasing just 1.5 per cent in 2017. Germany, the region's largest economy is forecast to expand 1.3 per cent in 2017, down from 1.8 per cent last year. The anticipated slump in growth in a key trading partner – the U.K. – is one of the factors behind Germany's weak outlook. The potential for a "hard Brexit" in which the British are left without tariff-free access to the large EU market remains the largest concern. In addition, if a trade war does erupt between the U.S. and China, European markets will not be left unscathed.

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